Refiners Win From St Croix Shutdown but Gasoline Could Hit $4 a Gallon in the Near Future

East coast consumers could see the return of $4 gasoline before the rest of the country, as another key refinery serving the region plans to shut down.

The St. Croix Hovensa refinery, owned by Hess Corp and the PDVSA, the Venezuelan state-owned oil company, announced Wednesday that it would close down next month, adding further pressure to the eastern U.S. gasoline market as the summer driving season approaches.

The refinery produces 350,000 barrels per day, and its loss is a gain for other refining companies, which have been suffering from tight margins and sagging consumer gasoline demand. Refiners’ shares rallied as a result, with Philadelphia-based Sunoco gaining more than 5 percent and Valero , also moving higher. Even midcontinent refiners, Holly Frontier rose, as did Marathon , up more than 5 percent.

“It’s going to affect supply, and we anticipate we’re going to see some (gasoline price) increases because of that. Actually, the entire east coast will be affected because you have some other supply issues and that’s going to compound things,” said Fred Rozell, retail pricing director at OPIS.

Rozell said he expects to see the national average reach $4 to $4.25 per gallon for regular unleaded gasoline when the gasoline market peaks this spring, between April and early May. He expects the price rise to be temporary, but the east coast could see prices 10 to 15 cents higher than the average in some areas.

“What the real worry is, is the Northeast,” said Andrew Lipow, president of Lipow Oil Associates. “You could certainly see, particularly in the Northeast, prices rising another 15 to 25 cents. The Northeast is going to become the California of the east.” He said the New York and Boston areas and Florida were among the biggest importers of St. Croix gasoline and distillates. For instance, 40 percent of the jet fuel supplied into Boston comes from St. Croix, he said.

East coast gasoline demand was 3.1 million barrels per day in 2010, and of that imports satisfied about 25 percent, with Hovensa supplying 13 percent of the imports, Lipow said. Another factor affecting the Northeast is that the St. Croix refinery was a large supplier of the more expensive and more difficult to produce summer grade reformulated gasoline blend sold in New York harbor.

While he expects to see higher prices on the coasts, Lipow does not see the national average for unleaded gasoline much above $3.75 per gallon for the peak season, unless there is a major development in the Middle East that drives crude sharply higher.

Refining Rally

But for the refining industry, the event is a positive and should help improve margins for the industry as more capacity is taken off stream.

It is also the latest in a series of shutdowns on the east coast. The east coast market, dependent on imported crude, has been particularly stressed by the high price differential that existed until recently for the international bench mark, Brent crude. The spread widened sharply after Libyan oil went off the market last year but has narrowed dramatically.

“With this shutdown, (the east coast) has lost well over 1 million barrels a day,” said Lipow. Sunoco recently moved to shut down the Marcus Hook refinery outside of Philadelphia, and it closed its Eagle Point facility in 2009. Conoco Phillips , meanwhile, has been trying to sell its Trainer, Pa. Facility, and there are other recent closures on the list.

Lipow said the lost supply from St. Croix will now have to be routed from elsewhere. Canada is a leading exporter to the U.S., as is Europe. It also makes any east coast refinery disruption a far more serious event.

“It definitely looks positive for refiners. It brightens the outlook. There will be less competition. There will be less supply. Hopefully if the economy turns around, it will be healthy for refiners,” said Oppenheimer senior energy analyst Fadel Gheit.

Gheit said margins are improving significantly for refiners, but he does not see gasoline prices rising much higher than they are now this spring, unless the price of crude rises dramatically.

“In the refining business, it really is location, location, location. It’s like who has an ocean view. It’s a margin business.. so if I can pass on any additional cost to my customers than I am making money. If I can hold on to any savings that I get from lower crude prices, then I’m making money,” said Gheit.

For the U.S. refining industry, it’s the midcontinent refineries — like Holly Frontier — that have had that so-called “ocean view” in the past year. They had been benefitting most, enjoying near record margins through the first three quarters last year, because they process West Texas Intermediate, cheaper than Brent. They also face less competition from international producers.

“But all good things must come to an end. The difference between WTI and Brent collapsed and went from $30 to $10,” said Gheit. London Brent crude was trading at $110.87 Wednesday, and WTI, or U.S. light, sweet crude was at $100.88 per barrel.

“Last year was an aberration. It’s not going to happen again. Therefore, the refining stocks were never rewarded for an unsustainable margin,” he said. Gheit said he got bullish on the group several weeks back and thinks the worst is over. “Obviously, they are doing well, going into a much better environment going forward with fewer refiners operating. With any help from the economy, I think the stocks are going to do well.”

The U.S. Gulf coast refiners, like Valero, also process imported crude. Valero, one of Gheit’s industry favorites, also exports oil to the east coast from its U.K. refinery.

Among refiners “there are no losers. They are all winners because the company that announced the shutdown of the St. Croix refinery is Hess and not only Hess’ stock is up but the whole sector is up,” he said. “Hess has been losing money on this refinery every quarter for the last three years. Basically they are cutting their losses.”

Gheit said the St. Croix closure could mean that Sunoco’s two refineries, the still operating Philadelphia refinery and recently shut Marcus Hook refinery could be more attractive in the eyes of potential buyers. If the company does not find a buyer, like Hess, it could shut the refineries and turn them into terminals. “They stop losses. They save on the inventory that is sitting in the tank farm in these terminals and that could be of hundreds of millions of dollars. For Sunoco, it could be about a billion dollars in inventory liquidation,” he said.

The U.S. refining industry has also seen a steep drop in consumer demand. In the fourth quarter, gasoline demand was down about 4 percent, so while U.S. drivers cut back in 2011, U.S. refiners became net exporters of refined products for the first time in a half century, with markets such as Mexico importing American gasoline.

In another development for the refining industry Wednesday, President Obama rejected the 1700-mile Keystone XL pipeline saying the project could not be adequately reviewed within the 60-day deadline set by Congress. However it does not mean the project cannot be reconsidered. The pipeline was proposed by TransCanada to transport Canadian oil sands crude to the U.S., but it faced opposition over concerns about its environmental impact.

Gheit said the pipeline would have brought much cheaper Canadian oil to the Gulf region. “This crude was basically going to displace imports. The more crude we bring from Canada, the less crude we bring from Saudi Arabia,” he said.